Stocks sail high on rate-cut hopes

Thursday

Nov 29, 2007 at 12:01 AMNov 29, 2007 at 10:32 AM

NEW YORK -- Wall Street barreled higher yesterday for the second day in a row, giving the Dow Jones industrial average its biggest two-day point gain in five years after a Federal Reserve official hinted that the central bank might lower interest rates again.

NEW YORK -- Wall Street barreled higher yesterday for the second day in a row, giving the Dow Jones industrial average its biggest two-day point gain in five years after a Federal Reserve official hinted that the central bank might lower interest rates again.

Investors' renewed hopes for a rate cut added to their relief that companies that made losing bets on subprime mortgages, such as Citigroup Inc. and Freddie Mac, are coming up with ways to raise cash. The market was clearly optimistic that at least some of the damage from the months-long credit crisis was finally being mitigated.

However, Wall Street has been fickle in recent months, with the Dow often rising and falling by triple digits, and no one is betting that the mortgage crisis that tripped up the nation's financial industry this year is over or that the market's huge gains so far this week will stick. Despite its spectacular advance, the Dow remains more than 6 percent below its Oct. 9 record close over 14,000. It has fallen because of worries that the housing market's slump will lead to further losses for banks and that the Fed can't keep slashing rates.

"The market's perception of whether the Fed cuts or not really changes by the day," said Michael Sheldon, chief market strategist at Spencer Clarke LLC. "We still have more data to come."

The possibility of lower rates seemed more compelling to investors than persistent concerns about a slowdown in economic growth. The Fed has already reduced rates at its last two meetings and continues to inject billions of dollars into the financial system through repurchase agreements to help calm the shaky markets. The central bank will hold its final rate-setting meeting of the year Dec. 11.

Plunging oil and gold prices also lifted investors' hopes for a rate cut -- if inflation is in control, policymakers have less reason to keep rates high. The Fed's Beige Book of economic activity across the country said that with the economy expanding at a reduced pace, most core prices are stable or down slightly.

The Dow soared 331.01, to 13,289.45, adding to the blue-chip index's 215 point gain on Tuesday and giving the market's best known indicator its largest two-day point gain since Oct. 11, 2002, and largest two-day percentage gain since Nov. 21, 2002.

The Nasdaq composite index shot up 82.11, to 2,662.91, giving the technology-dominated index its largest two-day point gain since March 4, 2002.

The broader Standard & Poor's 500 index climbed 40.79, to 1,469.02, logging its best two-day point gain since April 19, 2001.

"Everything we're seeing in the market is revolving about credit and encouragement that the Fed is going to bail us out again," said Alexander Paris, economist and market analyst for Chicago-based Barrington Research. "Investors are kind of ignoring the economic news like housing and durable orders that were all weaker than expected."

Indeed, signs that the Fed will reduce rates to keep cash flowing freely helped overshadow reports that in October, sales of existing homes fell for the eighth consecutive month and orders for big-ticket manufactured goods fell for the third straight month.